Cost the Annual Accounts Process

In order to create a change in the way the senior management team (SMT), board, and management address the annual accounts, you need to establish what is the full cost of the annual accounts process, including all board, management, and staff time, and all external costs (audit fees, printing costs, public relations, and legal fees, etc.). Exhibit 12.1 shows how to calculate the costs of an annual accounts process. The times are estimates and show what a typical 500 full-time-equivalent organization might be investing in the annual report preparation. It does not include investor relations, and so forth.

The SMT has lower productive weeks in a year because you have to take out, in addition to holidays, training, and sick leave, the time they spend traveling and in general meetings.

A Quick Year-End Is a Good Year-End

Many top U.S. companies report very quickly to the U.S. stock exchange. In my days as an auditor, IBM was well known for its speed of reporting. If your organization reports very quickly at year-end, ignore this chapter; otherwise, read and implement, as you and your organization are wasting too much time in this area. There are a number of benefits, including:

• Better value from the interim and final audit visits
• Improved data quality through improved processing
• Reduced costs, both audit and staff time
• More time for finance staff for critical activities, such as analysis, decision making, and forecasting
• Improved investor relations

Exhibit 12.2 shows a rating scale, based on my observations and benchmarking, for the time frames to have an audited and signed annual report (time from year-end date).

Establish Year-End Reporting Rules within the Finance Team

I always point out to accountants that we are all artists. Each year-end, we sculpt the result, and it can never be the right number, as there is no such thing as a “right” number—it can only be a “true and fair” number. If ten accounting teams prepared the year-end numbers for one company, there would be ten different results. Each accounting team will have made different judgment calls, different calls on materiality, accruals, and accounting treatments.

As mentioned previously, the finance team has to realize that they only need to do enough work to arrive at a true and fair view. All work done after this point has been reached will thus not be adding value. We therefore need some rules that the year-end reporting (YER) should adhere to:

• Month 12 numbers are the year-end numbers.
• YER should not be delayed for detail.
• Materiality for a misstatement to the year-end result is ___________.
• Ban spring cleaning at year-end and allow adjustments to offset each other on the “overs and unders” spreadsheet.
• YER can only be a true and fair view. (e.g., Hunting for the perfect number is now unacceptable.)
• The final year-end report will have extensive quality assurance checks to ensure it is free from any report-writing errors.
• Spreadsheets will not be used for key routines, such as the consolidation.

Year-end reporting is not the time for spring cleaning no matter how tempting it can be. This requires a reeducation within the finance team and with budget holders.

We want to have a regime where we catch all material adjustments and see the net result of them before any decision is made to adjust—for example, only a material year-end misstatement will result in processing an adjustment.

A draft finance team year-end rules is in the accompanying pdf download.

Help Get the Auditors Organized

An audit can very easily get disorganized. The audit firm will more than likely have a change in either the audit senior or audit staff, and first-year staff members will know little about what they are trying to audit, no matter what training they have had. So, help the audit team (it is in your interests) by:

• Allocating appropriate facilities for the audit room (desks, phones, security).
• Providing an induction session for new audit staff, as up to 40 percent of junior audit time is wasted in an unknown environment.
• Preparing all the financial schedules, in the agreed format, in an electronic file ready for handing over on day 1 of the final visit.
• Advising staff to assist the auditors and having a specific person designated as the audit coordinator, who should be contacted first, should the auditors need assistance.
• Holding meetings at key times with the auditors (e.g., the planning meeting, the interim meeting, and the meetings to discuss the final results).

The steps in each of these stages are set out and analyzed in detail in the annual accounts checklist, which is provided in the accompanying PDF download.

Renegotiate the Auditor's Sign-off Deadline

Your auditors have probably delayed the audit to fit it into their work schedule. We therefore need to renegotiate the auditor's sign-off deadline. The message is, “We are going to be quick, and so are you. If you cannot make this tight deadline, we will need to go elsewhere.”

Most auditors have already signed a set of audited accounts quickly. Sometimes it is because the companies wish to seek additional finance or want to be seen as a leading organization. The auditors have standard processes in these events. The benefits include:

• A level playing field—you have closed the numbers quickly and they also have to report back quickly.
• Any dirty laundry is not hanging on the line for very long—the auditors do not have the benefit of three to six months of hindsight to say, “Look what we have found.”
• It encourages good practices, such as using the Pareto 80/20 rule, Post-it reengineering of year-end processes, a hard close at month 11, and so on.

Have a Month 10 or 11 Hard Close

To enable the auditors to come in and commence their audit earlier, leading finance teams have negotiated a hard close on a shorter period. In most cases, month 11 suffices. Effectively, month 11 becomes the year-end, with all major assets, such as debtors, stock, and fixed assets, being verified. If a debtors' circularization is to be performed, this will need to be performed on month 9 or 10 balances, thus allowing enough time for responses.

Once the auditors have formed an opinion as to the P/L and balance sheet for this period, they need only to audit the movement of the numbers for month 12 transactions.

The larger and more complex the organization is, the greater the need for a hard close at month 10 results.

Assembling a Well-Structured Financial Statement File

This electronic file, if scoped with the auditors and diligently completed by the finance team, will save hours of audit and finance team time. The electronic file:

• Supports all numbers in the financial statements
• Supports all numbers presented in the notes to the annual report
• Includes all schedules and reports used to compile the financial statement numbers
• Shows the links to the G/L
• Is organized in four sections: revenues, expenses, assets, and liabilities
• Contains explanations for significant variances between the current and the previous year numbers
• Contains copies of all monthly management reports

Embrace Abandonment

The lessons of abandonment (Peter Drucker) and how not to be trapped into living with the results of other people's thinking (Steve Jobs), outlined in Chapter 1, need to be embraced. Your year-end processes, spreadsheets, and documentation are the “result of other people's thinking.” We need to abandon the processes that have no purpose other than doing it because we did it last year. Some easy and common abandonments to embrace:

• Using a spreadsheet for the consolidation
• Using year-end as a time to tidy up the accounts by processing many minor adjustments
• Showing additional analysis in the annual report that is not required by company law (It is sad but true—the annual report will be largely unread).

Post-it Reengineering

The Post-it reengineering process was outlined in Chapter 10, and you will need to reread this section to understand the process. The suggested attendees for the reengineering of the year-end will include all those involved in year-end including accounts payable, financial and management accountants, a representative from the auditors (the audit manager), and representatives from teams who interface with year-end routines (e.g., someone from IT, payroll, and the chairman's office). The agenda for the session is set out in Exhibit 12.3.

Scrum First Thing Every Morning

The scrum techniques outlined in Chapter 10, are ideal for the annual accounts process. On the year-end accounts, those involved in the preparation would meet, every morning, for anywhere from 10 to 20 minutes in a stand-up meeting. The importance of a stand-up meeting is that it is quicker, as we are more alert. At each session, attended only by those who are currently involved in a year-end accounts activity, they are asked to talk about:

• What they did yesterday on the annual accounts
• What they are doing today on the annual accounts
• Roadblocks that are barriers to progressing the annual accounts

At the end of the session, the group ends the session touching fists, an homage to the source of this technique. When the auditors arrive it may be appropriate for them to join the scrum. Would it not be nice to know what they have achieved yesterday?

Please reread the section in Chapter 10 to understand all the procedures of this important process.

Consolidation and Intercompany Software

Your year-end will only be efficient when you have utilized consolidation software so that you can consolidate without fear of a screen full of REF! REF! REF! As mentioned in Chapter 4, performing a consolidation in a spreadsheet is inappropriate, and adds unnecessary error factors to the process.

There are now excellent systems that organize this for you and enable the subsidiaries to have their own general ledger and account code structure. Their trial balance is simply mapped into the consolidated entity's account codes. A search with any search engine will also find some freeware, robust older versions available at no cost. Try this search in your search engine, “consolidation+software+freeware.” It worked for me.

Larger conglomerates need to have a sophisticated communication system between all related companies. Far too many finance teams are conned into thinking that they need to standardize the G/Ls for this. Yes, it will do the job, but at what cost? The primary beneficiaries are the G/L providers and the associated consultants who, no doubt, can now buy that second summerhouse that they so badly need, by their favorite lake.

The answer lies with accessing sophisticated intercompany software that enables an automatic interface for intergroup transactions where one party to the transaction does the entry for both G/Ls. This software, like the consolidation software, allows subsidiaries to keep their own G/L and account codes.

Reread Chapter 4 for a list of the intercompany and consolidation software applications.

Maximize the Use of the Existing G/L

Your G/L will have many unutilized features. So ask your G/L consultant to come for a day to see where the finance team can better use the G/L's built-in features for monthly and year-end reporting.

Collaborative Disclosure Management

As mentioned in Chapter 4, this software ensures that you have one database that is the sole source of the truth. For the year-end accounts, the input into the notes to the annual accounts would be controlled this way.

I would consider this software a must have for any organization over 500 full-time equivalents. It will be invaluable for year-end, month-end, and annual planning documentation.

Appoint an Audit Coordinator

The first step to reducing stress and improving communication between staff and the audit team is to have a full-time audit coordinator. This person should be a staff member, not necessarily in finance, who knows most people in the company and knows where everything is, in other words, an oracle.

You may find the ideal person is someone in accounts payable or someone who has recently retired. The important point is that the individual should have no other duties during the audit visits (both interim and final) than helping the audit team. Give the individual a pleasant room and say, “When not helping the audit team, you can simply put your feet up.” Do not get tempted to give the person additional duties. The audit coordinator's tasks include:

• Providing an induction session for new audit staff
• Gathering any, and so forth, that the auditors need
• Responding to information requests the auditors have made that are still outstanding
• Setting up designated contact points in every function (e.g., whom to speak to in the marketing department)
• Organizing meetings with the designated person in the section they need to visit

Complete the Drafting of the Annual Report before Year-End

It is desirable to complete the annual report, other than the final year's result, by the middle of month 12. This will require coordination with the public relations consultant who drafts the written commentary in the annual accounts and discussions with the chairman of the board and the CEO. Your last month's numbers will not greatly impact the commentary.

As mentioned, the annual report is not an eagerly awaited document. If you are a publicly listed company, the stock market analysts rely more on the in-depth briefing your organization provides them. Your shareholders access a summary of the results from their broker.

Limit When Changes Can Be Made

Year-end is not a time for spring cleaning. We will apply the rules already mentioned in this chapter. We will make the month 12 numbers the final-year numbers. The “overs and unders” schedule, as shown in Chapter 3, will be maintained, and we will record any major adjustments on this schedule. When the auditors arrive, we hand over the “overs and unders” schedule informing them that these are the adjustments to date. The auditors take ownership and update with any other subsequent adjustments.

You will often find that adjustments have a tendency to offset each other. If the auditors find a major adjustment, look in the opposite direction and you no doubt will find another to offset it.

The year-end adjustments will be reviewed as follows:

• Stage 1: Close of first working day (part of preparing the flash report for month 12)
• Stage 2: Day 3 when we finally issue month-12 results
• Stage 3: The morning when final audit starts so auditors have the bottom-line number
• Stage 4: When the final tax entries are known
• Stage 5: Final audit agreement meeting

Effective Stock Takes

Stock takes should never be conducted at any month-end, let alone at year-end. There is no need to do this, as your stock records should be able to be verified at any point in time. It is a better practice to conduct rolling stock counts rather than one major count that closes all production. A well-organized stock take includes:

• Trained stock takers working in pairs, each from a different department, to enhance independence and thoroughness.
• Highlighting obsolescent stocks, which can be targeted in the preceding months to reduce the write-down at year-end.
• Rolling stock inventory (counts) throughout the year (e.g., a jewelry company with a chain of stores counts watches one month, engagement and wedding rings the next month, in the quiet times during the month).
• Ensuring the stock area is clean and organized before the counting, to ensure a more accurate count (e.g., same stock items are together).
• Adding visible tags to counted items.
• Having a good celebration once the count has been done (this will ensure willing helpers next time).

Estimating Added Value in Work in Progress and Finished Goods

Auditors can get lost very easily in auditing the added value in work in progress (WIP) and finished goods. On one audit it took me a couple of weeks of elapsed time to trace the WIP through its stages, using random samples. In the second year, it was suggested that I look at how many weeks of production there were in WIP, which was easy to confirm, then at how many weeks of direct and indirect overhead could and should be absorbed. The audit of WIP took less than four hours. Thus, help your auditors by providing working papers to verify the reasonableness of complex valuations such as WIP.

Effective Fixed Asset Verification

The key to a better use of the fixed asset register (FAR) is a good attitude. Many finance teams see the FAR as a necessary evil, and thus little focus is given to really driving it properly. Few finance teams grab the opportunity and turn the FAR into a valuable system:

• Use bar codes on all assets so asset verification is a paperless exercise with a scanner.
• Set higher capitalization levels than those stated by the tax authorities, radically reducing the volume in the FAR—it being recognized that a tax adjustment can be performed easily, if necessary.
• Log maintenance for key plant as well as the up-to-date expected life, so useful graphics of expected lives of key assets can be shown to the board.
• Reduce the number of fixed asset categories, as every extra coding serves only to create more chances for miscoding (remember that we are to apply Pareto's 80/20 rule).
• Perform rolling fixed asset counts rather than doing it all at one time (e.g., verify equipment in the factory this month, computer equipment next month, etc.).

Importance of the Internal Auditors

The internal auditors can significantly reduce the external auditors' work. Many organizations contract out this function to an independent firm. I believe an in-house internal audit team will pay for itself many times over by:

• Increasing the use of efficient and effective procedures.
• Providing a great training ground for new graduate accounting staff.
• Focusing on reengineering exercises and other revenue-generating or cost-saving activities (e.g., in a one-week exercise, most internal auditors would be able to save 5 percent off the future telecommunication costs).
• Providing the external auditors with all their main working papers filled out—the internal auditors will know how to do this if they have attended the external auditor's staff training courses.

Manage the Management Letter

It is important that you insist that the auditors put a bit more care and attention into the management letters and that they are delivered within two weeks of the interim and final visits. Prompt management letters mean that management can rectify a problem immediately.

Management letters are often an afterthought, completed many months after the final audit, when much has been forgotten. The audit staff assigned to write the management letter are often relying on inadequate notes. The resulting letter is poorly constructed, with comments about a minor procedural failure easily being taken out of context by the board.

We need to ensure that all errors noted should be stated in context (e.g., We found 20 invoices with the wrong prices. We understand this was because _________. Management has rectified this situation and we tested a further sample of _______ and found no further errors. We note that of all the other price tests we performed, there were no other errors. We do not believe this has led to a loss of profits greater than $______).

Also, we want the auditors to comment on our strengths (e.g., “We would like to comment that the new monthly report formats are the best we have seen; they are clear, concise, and efficiently produced”).

I recommend that you insist that the draft letter is prepared before the audit team leave. Say to the visiting audit team, “We will go to the end-of-audit function when we have seen the letter.” They will thank you for making them more efficient.

Derive More Value from the Interim Audit

In conjunction with the external auditors, look at making more use out of the interim audit. You may have implemented a new expense system, so ask the auditors to spend some time testing compliance. Ask them to cover more branches, ensuring nearly all branches are covered every two years. This will cost more but will be worthwhile.

Always remember that it is perception that rules the roost; staff members in remote branches will begin to conform to company policies if they know that auditors are to arrive and that they always test the compliance of the key systems along with all the new systems.

It is a good practice to have the first interim visit in the first half of the year to assure that the organization's staff maintains vigilance on compliance.

Restrict Access to Confidential Information to the Audit Partner

It is important to inform the staff and audit team about what is subject to restricted access (e.g., it might be that only the audit partner is able to see the senior management team's payroll). I remember the days when the audit team would fight over who was to look at the payroll; just remember, it is human nature to be nosy.

Data Capture from Reporting Entities

Those of us who have reported to a finance department in an international conglomerate will know that the reporting pack was designed by a rocket scientist without any regard to materiality. Endless pages of data are gathered and sent, most of it meaningless. “It could be useful to have this,” “Better ask for that in case I might get a question.” The result is hours upon hours spent around the world gathering the data, which, by the way, are never used by the subsidiaries to manage their business.

How did this happen? First, the CFO delegated the task and then took little or no interest in how big the reporting pack had grown. The CFO may have observed, “The reporting pack looks a bit large. Are you sure you need all of this information?” Second, nobody ever calculated the full cost of the data-gathering process and compared it against the benefit. If this task was done, common sense would have won out. Third, there are seldom effective forums for management accountants in the subsidiaries to challenge those in the head office by saying, “Why do you need this?” or, “Tell me what you do with all of this.”

Mapping to Group Systems and Control

Often, the mapping of data from reporting entities involves extensive manual procedures, spreadsheets, and the batch transfer of files, all of which introduce the potential for serious error every step of the way. It is often very difficult to spot these errors, which have a nasty habit of rearing their ugly heads during the final audit. In addition, the scope for mistakes increases by the number of entities involved and the frequency of changes in the group's reporting pack, brought about by management accountants having brain waves and the need to meet regulatory changes.

“Last-Mile” Information Handling

The efficient marshaling of information post consolidation is vital and is known as the last mile in annual reporting. In the last mile, there are PDF files, spreadsheets, PowerPoint slides, Word documents, and email communications, all of which provide input for the notes to the annual accounts. It is important that they are accessible to all those on the annual accounts team rather than residing in individuals' email inboxes and C drives.

Robust Quality Assurance Process

The quality assurance steps from Chapter 7 apply here. They include:

• Ban all late changes to the annual accounts (use the “overs and unders” schedule as discussed).
• Cross check all numbers for internal consistency.
• Use the two-person read-through.
• Look for those last two errors.